Igarashi Motors: Running Over Minority Shareholders?

Promoters of Igarashi Motors voted on the related party transaction (RPT) resolution presented at the company’s 2015 AGM, which pertained to transactions with entities of the Igarashi Group (currently classified as a public shareholder). Had the promoters not voted, the resolution would have been defeated.

In its voting advisory report, IiAS had raised concerns that the cumulative value of the proposed transactions, over a period of two years, will amount to Rs.11 bn, a multiple of the annual turnover of Rs.4 bn. In addition, the explanatory statement was opaque and did not provide granular details on the specific nature and type of contract each related party will be involved in. Given the lack of clarity, IiAS had recommended shareholders to vote against the proposal.

Shareholders heeded IiAS’ advice – 74% of non-promoter shareholders voted against the resolution. Yet, promoters chose to elbow out the minority investors by voting their shares. IiAS raised the issue of promoters voting on the RPT resolution with the company – the company claims the promoters are not directly interested in the resolution and hence they are compliant with the law. This is only partially correct: promoters can vote on this resolution under the Companies Act 2013, but are not allowed to vote on this resolution under the Listing Agreement.

In its stated goal of easing of doing business, MCA has steadily diluted its stance on related party transactions. As per the new rules under Companies Act 2013, only interested parties are not permitted to vote on RPT resolutions. Other related parties, who do not have any material or pecuniary interest in the particular transactions, may vote on their shares. However, in order to protect minority investor rights, SEBI has held all along that related parties (and not just interested parties) cannot vote on RPT transactions. It is this higher standard that should hold.

Shareholders have done their bit in voting on the resolution. It is now upto the exchanges and regulators to act quickly to resolve this issue – more so, given that the company seems to consider the resolution to have been passed.

To know why IIAS thinks Igarashi Motors has run over its minority shareholders, please see the enclosed report.